Thoughts on the Market

From March 2009 to Dec 2009, the market rose like crazy. I fully admit those who were in the game during this period, benefited greatly as the water level rose back up, but we are now at a point where you are just as likely to lose money.

I’m not just talking about this January. Ever since Nov 09, this is how I felt but I was lucky to have strong performers to round out the year. However, what we forget is that the effects of a bull market invites the greater fools to join the game again. When things are going good, it is human nature to forget what happened just the other day. We then put our guards down, chill and put things on autopilot until we see that the engine has caught fire.

My discipline has severely waned over the past couple of months as I was caught up in so many activities and didn’t apply the time and focus towards ideas. I already made a couple of silly mistakes that were easily avoidable by not double checking my calculations and it looks like one of those mistakes could cost me money.

So I’m cleaning up my portfolio at the moment to prevent a fire. Some stocks I own have reached what I deem to be its intrinsic value based on its current state and it’s time to sell rather than hold even if the fundamentals support it.

Psychological Game

Draw the next part of the graph. Which direction would the graph follow?

If I was a gambler, I’m betting that you felt something good about the direction of the graph and the path it would take. Did you know that because of the optimistic attitudes of the western culture, you were likely to believe it would go up and vice versa.

This is directly related to how people view the market. They look for trends, but this year, I’m tightening my belt because things should be much tougher. It’s shameful that I don’t have data, graphs and historical figures to prove my case, but no amount of data could predict what happened in Haiti or with the tsunami….

What I’m saying is that anything could happen.

2010 Plan and Actions

Here are some things I need to improve for 2010 and beyond. It’s basic stuff but I wanted to remind myself.

Risk reduction will be utmost important. Place even more emphasis on protecting the downside than last year. Make it so that even if I get it wrong, the margin of safety will still allow me to exit at a profit.

Capital allocation. Knowing how much to assign to a particular investment based on the level of your analysis and conviction is a fundamental discipline of investing. Last year, it was easy to put 100% into a single stock and make out like a bandit, but that won’t work anymore. Prepare to roll up sleeves for more work.

Don’t be afraid of cash. Up until last month, I had about 20% of my portfolio in cash. But I kept wanting to do something with it. Don’t believe that you have to be 100% invested. Patience always wins.

Leverage strengths. Leveraging, increasing and fortifying my strengths is far more important than trying to strengthen my weaknesses. My strength lies in my thirst for knowledge and to dig deeper into the numbers and analysis to visualize what the financial statements are telling me and the validity of a business. By trying to improve my weakness, I am only doing it at a mediocre level. Admit the things I lack and stay away from it.

Do more by not doing. By nature I have to run things efficiently. Guess it’s why I’m an engineer by trade. By eliminating the tasks where I waste even 30mins, I could spend the time effectively and apply it to rewarding activities.

Understand emotional reactions to events. Knowing the range of my emotions related to the stock market will help in how to overcome it and the level of conviction I have.

Do it old school. Always remember why and how it started. Back to basics.

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4 responses to “Stock Market Thoughts & Action Items”

This couldn’t have been any more timely. Small cap stocks outperformed the markets quite a bit last year, because of a complete lack of liquidity, but the discipline that you’re talking about is very important.

It’s really really really (should I say this more?) easy to get caught up in the hype of something and put our discipline aside. Drinking the koolaid is way too easy!

If you’re ever unsure about what you’re doing, you can always stop. Because last year was such a rally, it hasn’t cost me money, but the downside was that even mistakes would turn out to succeed.

I don’t remember if it was on this site or another site that I read this, but knowing what is being done isn’t enough, you need to know why. Always think about what’s in it for the other person.

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